Insurance first

Insurance is the only financial product designed to pay out far more than you put in, at the moment you can least afford the event. That is what it is for, and it is why it comes before investing.

Term insurance

IRDAI's description:

You can choose to have protection for a set period of time with Term Insurance. In the event of death or Total and Permanent Disability (if the benefit is offered), your dependants will be paid a benefit.

And the sentence that explains both its cheapness and its reputation:

In Term Insurance, no benefit is normally payable if the life assured survives the term.

You pay a premium, and if you survive the term you get nothing back. People describe that as "wasted money", which is the same logic that would call a year without a fire a wasted home insurance premium.

Nothing coming back is why it is cheap. The insurer is pricing one risk and nothing else, so a large cover costs a small premium — and a large cover is the entire point.

Why insurance and investment should be separate

The products that return your premium cost many times more for the same cover, because part of your money is being invested and the rest is paying for a much smaller sum assured.

Two things go wrong at once.

The cover is too small. The premium that would buy ₹1.5 crore of term cover buys a fraction of that when bundled, and the whole purpose was the size of the payout.

The investment is poor. Costs are embedded, the returns are rarely competitive with a plain index fund, and the structure is hard to compare because the two functions are blended.

Keep them apart. Buy protection as protection and invest separately — chapter 10 of the mutual funds subject on costs, and chapter 12 of this subject on the whole plan.

How much cover

Rough arithmetic, and rough is adequate:

cover ≈ outstanding loans
      + annual household expenses × years until dependants are independent
      − assets already available to them

A household spending ₹8 lakh a year with a ₹40 lakh home loan and children fifteen years from independence needs on the order of ₹1.6 crore. Most people holding a policy at all hold far less than their own arithmetic would produce.

Who needs it: anyone whose death would leave someone financially worse off. Who does not: a single person with no dependants and no co-signed loans, whatever a seller says.

Health cover

The other essential, and the one whose absence does the most immediate damage. A serious illness produces a bill and removes the income that would have paid it.

Two things worth knowing beyond the premium.

Employer cover is not enough on its own. It ends when the job does, which can be the same event as the illness.

The exclusions and waiting periods are the product. Pre-existing conditions, specific procedures, room rent limits. These are disclosed in the policy document and are what decides whether a claim is paid in full.

Disclosure decides the claim

The most important paragraph in this chapter, and IRDAI states it directly:

The disclosures made in a proposal are the basis for underwriting a policy and therefore any wrong statements or disclosures can lead to denial of a claim.

What you wrote on the form is the contract's foundation. An omitted condition, an understated habit, an unmentioned earlier policy — any of these can mean the claim your family makes is denied, years later, when they cannot do anything about it.

So the rule is simple and absolute: disclose everything, including things you think are irrelevant and things an agent tells you not to mention. A higher premium on a policy that pays is better than a lower premium on one that does not.

The free look period

A right most policyholders do not know they have. IRDAI:

The policyholder can seek refund of premiums if he disagrees with the terms and conditions of the policy, within 15 days of receipt of the policy document (Free Look period).

Fifteen days from receiving the document to read it properly and cancel. The refund is subject to deduction of medical examination expenses, stamp duty and proportionate risk premium for the cover period.

Which means the terms you were told verbally can be checked against the terms actually written, with a way out if they differ. Reading the document in that window is the single most valuable thing a new policyholder can do.

Nomination

Name a nominee, and keep it current after marriage, children or a death in the family. A policy with a stale or absent nomination turns a straightforward payment into a legal process, at the worst possible time.

The point

Term insurance pays your dependants and returns nothing if you survive, which is why it is cheap and why cover should be large. Keep insurance separate from investment. Disclose everything on the proposal, because wrong disclosures can mean a denied claim — and use the 15-day free look period to read what you actually bought.